Oil Traders Are Cashing In on Volatile Markets

John here. This piece examines another set of corporate beneficiaries of the crises of COVID-19 and the conflict in Ukraine: oil traders. As Kimani notes, this isn’t just independent traders, it also includes the trading desks of the big oil companies. Many of them continue to trade in Russian hydrocarbons even though it is allegedly the sanctions regime against Russia that has driven prices up globally.

By Alex Kimani, a veteran finance writer, investor, engineer and researcher for Safehaven.com. Originally published at OilPrice

  • Oil traders are making the most of oil price volatility and a global energy crisis, leveraging their storage facilities, their global network of terminals, and their shipping fleets.
  • Industry giants such as Vitol, Glencore, Gunvor, and Trafigura have all continued to lift Russian crude, although some have made commitments to stop business with Russia.
  • Oil majors, particularly the European ones, have added billions of dollars to their bottom line with their secretive and sprawling trading divisions.

The world’s commodity and oil traders are playing a crucial role in securing supplies amid a global energy crisis and disrupted trade flows following Russia’s invasion of Ukraine. Last week, the world’s biggest oil and gas traders met in Singapore for one of their industry’s top conferences. The war in Ukraine has been a double-edged sword for these traders who historically have been leading shippers of Russian oil. On one hand, they have benefited from being able to buy Russian oil at a big discount but on the other hand, the viability of their long-term investments in the country has been brought into question due to western sanctions against Russia.

Energy security is number one, price is number two, sustainability is number three. That’s the short-term set of priorities,’’ Russell Hardy, chief executive officer at Vitol Group, the world’s top oil trader by volume, has told Bloomberg.

For physical suppliers of crude and fuels, disruptions caused by the Covid-19 pandemic as well as Russian sanctions have been creating new trade flows and opportunities. Dozens of giant commodity and energy traders saw their profits explode during the pandemic thanks to their ability to leverage their storage facilities, global network of terminals, and shipping fleets to cash in on supply disruptions, soaring energy prices, and rising demand.  Vitol generated a record net income of $4.2 billion last year, with rival Mercuria raking in $1.25 billion. Vitol announced a major share buyback to the tune of US$3 billion as a way of rewarding the roughly 450 senior staff who own the company. Meanwhile, Glencore Plc also enjoyed record numbers, as did Trafigura’s trading arm.

According to ship tracking and port data, Switzerland’s Vitol, Glencore, and Gunvor as well as Singapore’s Trafigura have all continued to lift large volumes of Russian crude and products including diesel. Indeed, back in April, Oleg Ustenko, economic adviser to Ukrainian president Volodymyr Zelensky, wrote to the four companies demanding that they stop trading Russian hydrocarbons immediately since export revenues are funding Moscow’s purchase of weapons and missiles. Vitol has pledged to stop buying Russian crude by the end of this year, but that’s several months away. In a management report, Vitol has revealed that it is divesting its stake in Vostok, the flagship project of Russia’s state oil champion Rosneft PJSC in which Vitol had invested $886 million. Trafigura promised it would stop buying crude from Rosneft, but is free to buy cargoes of Russian crude from other suppliers. Glencore has promised it wouldn’t enter any “new” trading business with Russia but appears willing to maintain previous deals.

During last week’s summit, officials from Indonesia and India talked about their inability to ignore cheap Russian supplies while others wondered whether China’s Covid zero approach and a European recession would derail consumption. Oil prices are currently below where they were prior to the war mainly due to macroeconomic headwinds such as the stronger U.S. dollar and recessionary fears.

Big Oil Trading Desks

This isn’t just about independent trading desks. Big Oil has set up secretive and sprawling trading divisions which frequently add billions of dollars to their bottom lines. Whereas several U.S. oil companies have tried their hand in oil trading, it’s European oil and gas supermajors that seem to have perfected the art and science of leveraging volatile oil markets to reap big rewards.

Exxon Mobil (NYSE: XOM) last year gave up on building an energy trading business to compete with European counterparts after low oil prices forced it to heavily cut the unit’s funding amid broader spending cuts. Exxon traders found themselves short on capital to take full advantage of the volatile oil market. While the pandemic sent oil and gas prices plunging before a strong rebound created an immense profit opportunity for trading operations willing to take on the risk, cash flow problems, and pressure from investors forced Exxon to systematically remain on the sidelines, limiting its traders to working only with longtime customers and subjecting most trades to high-level management review.

BP Plc. (NYSE: BP), on the other hand, has managed to build one of the most successful energy trading ventures by an oil and gas major.

In its latest earnings call, the European supermajor reported that its underlying replacement cost profit – a metric similar to the net income figure commonly used by U.S. oil companies – climbed to $8.45 billion in the second quarter from $6.25 billion in the first quarter, reflecting strong refining margins, higher liquids realizations, and exceptional oil trading performance. That figure was well above Wall Street’s expectations of $6.79 billion.

The main driver of the large beat was another exceptional quarter of oil products trading,” RBC Capital Markets said in a note.

But those record profits were by no means a fluke. BP’s trading desk has been astute at taking advantage of highly volatile energy markets in the past, with former CEO Bob Dudley and his army of 3,000 traders displaying an uncanny ability to predict the oil price trajectory.

In essence, BP traders had turned bullish after months of slumping oil prices. BP’s trading arm argued that the price had fallen so far that it could only go up, and Dudley agreed. And, in complete secrecy, the company was willing to bet that its traders were right again and put its money where its mouth was. A former BP executive with direct knowledge of the trade told Bloomberg that it “made a lot of money,” putting the payout at $150 million to $200 million. Publicly, however, BP said almost nothing.

BP’s rivals Shell Plc (NYSE: SHEL) and TotalEnergies (NYSE: TTE) are also some of the world’s largest commodity traders. Shell is one of the world’s largest oil traders, going toe to toe with the largest independent houses such as Vitol Group and Trafigura.

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  1. Louis Fyne

    Whenever you increase complexity in a system (eg, sanctions, state franchise laws, US military procurement), it’s inevitable you create more opportunities for middle-men to make profits.

    1. PlutoniumKun

      I think it is more unidirectional than just ‘middle-men’. In my experience of specific markets, when they are poorly regulated its the lower level spivs and chancers who get rich. When regulation is tightened up, the ability to manipulate things moves ‘upwards’ to those wealthy enough to hire the best financial/legal advice. Or put another way, it benefits major corporations and the PMC.

  2. The Rev Kev

    These guys are making out like bandits in the present chaotic system and I suppose that the same is true of gas traders. Places like the EU could have stuck with fixed-price long-term contracts but they instead punished those who used such tools and were trying to force everybody onto the spot price market. And this article demonstrates what happens when you do this. The thing about those contracts was that they gave the oil/gas suppliers the ability to do long-term planning as well as the confidence to make long-term investments in infrastructure. So once again, a tiny minority of traders and corporation benefit but at the expense of everybody else.

  3. Agnieszka Gill

    @The Rev Kev, They, the EU, absolutely should, and they’ve been warned about shifting to spot market and away from long term contracts- which EU made into a law, with horizon in 2048?, which is only 26 years away. Review of EU think tanks and economic summaries, NOBODY seems to be concerned what the sanctions policy will do to German industry, although they seemingly know that certain industries may have to permanently close. EU does not intend to protect population or industry, only itself.

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